Games are now bigger than music at High Street retail. Something to shout about? Only if you believe that being more valuable than an industry segment which is universally acknowledged as being in terminal freefall is a cause for celebration. The games industry is in the happy position of being able to watch the mistakes (and there have been many) that the music industry has made and to draw from them lessons on how we can best capitalise on the changing nature of consumers’ relationships with the media they enjoy. Otherwise, we run the risk of following the recorded music industry into rapid decline.

Lesson 1: The consumer sets the price

There are many commentators who believe that within two decades, all music will be free. Already, you can find many copyrighted songs and music videos freely available on Youtube and other websites. There is no doubt that some consumers will pay for music, perhaps on impulse in a supermarket, or because they must own the latest ringtone, or due to the convenience of iTunes. But the reality is that many consumers do not feel the need to pay for music and the era of premium-priced, back-catalogue albums is rapidly becoming a distant memory.

In the games world, publishers may believe that they set the price of a game. This is not true. Retailers may claim they are the price-setters. This is closer to the truth, but still not accurate. It is the consumer that sets the price that they will pay for games. There are many mechanisms by which this is done. These include:

Piracy: The industry’s bête-noire, which will never go away (unless all product is free to buy, of course)

Rapid discounting: Why buy a game at $39.95 when it will be $19.95 in three months and $9.95 in six? There is admittedly a faster curve for PC games than console titles, but a consumer can set the price simply by waiting.

Trade-ins: For many consumers, the price of a new (to them) game can be as low as a fiver, the difference in price between the credit they get for a trade-in game and the cost of a new title.

The stark reality, demonstrated most cataclysmically in the music industry, is that as distribution routes multiply and entertainment media becomes less scarce, the consumer has more power than the media owner in terms of price setting. The music industry’s attempts to maintain premium pricing for their packaged products seem already doomed; it would be foolish of the games industry not to plan for a similar scenario to emerge for us.

Lesson 2: It’s all about experiences

It seems perhaps unlikely to draw business analogies from Madonna, but on the other hand, she has successfully reinvented herself in three successive decades, and her recent album decisions can be seen as a defining moment for the music industry. Madonna recently departed from her long-standing relationship with record label Warner Bros and signed a new $120 million, ten year deal with Live Nation whose expertise is unequivocally in live events. This decision by Madonna may well represent her belief that the monetary value of the album is low, maybe even zero: albums and singles will become marketing tools for fabulously profitable live tours, not money spinners in their own right. Radiohead’s recent experiment asking consumers to choose how much to pay for In Rainbows is an extreme example of this trend.

The games industry has already taken this to heart. World of Warcraft is entirely about experiences and is probably the most cash-generative game around, but this learning may go further than simply suggesting that the future of all games is massively-multiplayer. In a crowded entertainment market, one-off events and experiences command a major premium – just think of the high and rising prices of concert tickets. Finding ways of offering unique game events and storylines that take place in real time would be one powerful way of adapting to the changing market.

Lesson 3: The music industry is thriving, it’s the music companies that are stuffed

No-one is arguing that consumers don’t want music anymore. Quite the reverse: the easy availability of music on iPods, PCs, mobile phones and elsewhere mean that music is more in demand than ever. What is suffering is the bloated, inefficient, archaic structure of record labels that were set up in the days of scarce distribution and limited competition, when the album ruled. Whether Guy Hands’ Terra Firma can make a success of EMI remains to be seen; what is clear is that the days of massive record labels making enormous profits on a limited number of titles while running inefficient infrastructures are well and truly over.

Lesson 4: Profits come from secondary sources

One part of the music industry remains highly profitable – music publishing. That is the business that owns the underlying copyrights and licences it out to films, commercials, video games and other media channels. They generate revenues from ringtones, radio play, in fact on any occasion when a business wants to be associated with the brand, band, sound or emotion that a particular track can offer. So it is not the case that music cannot generate money anymore. Simply, as per Lesson One, that with the consumer setting the price, music companies must seek to exploit alternative sources of revenue wherever possible.

None of this is new to the games industry. In-game advertising has been exhaustively discussed in these pages. Micro-transactions are a rapidly growing source of revenue, particularly in the Far East. Massively multiplayer games, like Runescape or indie game Dark Wind, offer a reasonable level of gameplay for free, but some of the cooler features, like owning property or advanced missions, are reserved for paying subscribers. The lesson from the music industry is that in some cases, giving the game away may be the best strategy, provided that the alternative sources of revenue are clear.

Lesson 5. The nature of distribution is changing

Entertainment media developed in an era where distribution was scarce, whether that be due to limited airwaves for television channels, or the need to get physical products into stores. It is now competing in a world where distribution costs are rapidly heading to zero. The Canadian Broadcasting Corporation recently broadcast a first-run television show, Canada’s Next Great Prime Minister, simultaneously on a terrestrial channel and via BitTorrent technology, giving a glimpse of a world where peer-to-peer networks will be a legitimate distribution channel for mainstream media, not a byword for illegal downloading.

Physical products are becoming less key. It is already difficult to go into a store and find a full range of PC games – these are more easily found on the Internet, whether in boxes or for direct downloads. Consoles will surely follow. There will remain a place for physical goods, whether that be impulse purchases at supermarket checkouts, for gifts and for premium products for early adopters who want to be amongst the first to own Grand Theft Auto IV or Halo 3.

But with Sony and Microsoft rapidly embracing the digitally-distributed world, any publisher making the assumption that the existing business model for physical product will be the predominant model in ten years’ time is taking a very significant gamble.

So what lessons can we draw?

The games industry has many similarities with the music industry, but also many differences.

The biggest challenge facing the industry is how to adapt to a new generation of media consumers. It is not that these consumers aren’t prepared to pay for their entertainment, far from it. Expenditure on entertainment is on the rise, but the old model, of monolithic publishers and powerful retailers controlling channel distribution is dying.

Retailers have responded, embracing the trade-in model despite the bleatings from publishers and developers about revenue loss. Massively-multiplayer companies like NCsoft have experimented with a variety of different pricing models for their titles, ranging from boxed product sales to subscriptions to in-game transactions and more. And the revitalised Infogrames, under David Gardner and Phil Harrison, has made very interesting noises about the future of games in a broadband world.

But the one thing that stands out is that the games industry had better watch the music, and the film, industry carefully. Or else the cries of how badly those industries dropped the ball and lost their audience to file-sharing and piracy will be directed at us.

FOUR ways the games industry is different

1. Marginal costs are higher

Making an album is cheap – stick a handful of artists in a studio with some instruments and an album emerges. The difficulty is finding the people with talent. Games development is expensive, with each game significantly more labour and resource-intensive than any album. This leads to arguments from publishers and developers that consumers have to pay more for games than music because they cost more to make. In reality, consumers set the price: if they don’t want to pay, they won’t. It’s no use bleating to consumers about team sizes and the cost of rendering Lara Croft in a billion polygons. They decide whether they would rather spend forty quid on four DVDs, 40 tracks on iTunes or a single game. This makes responding to the fact that the consumer sets the price more challenging for us than for the music industry; it doesn’t make it any less important.

2. Our back catalogue is worthless

This is slightly over-stated, as the pace of change of technological advancement is becoming less visible to the average consumer. However, we don’t have the long-tail of high value content that sustains the music and film industries. This is beginning to change, as services like Metaboli and AWOMO help publishers generate revenue from older titles, and should be a real focus for all publishers as we move into an era where step-changes in technology no longer happen so frequently.

3. Digital distribution is challenged by the size of games

Music is, digitally speaking, small. An individual track, or even an album, is quick to download on a reasonable broadband connection. Compare that with games on multiple DVDs which can weigh in at over 10GB and could take a day or more to download. This inherent advantage, that game sizes are growing at the same pace as or faster than broadband speeds, is not a sustainable benefit, but it does give us some breathing space.

4 Developers need infrastructure

Not only is making a game more costly than making an album, but the technology and expertise that go into making a game needs to be built up over time. No one has yet created a triple-A title using the Hollywood model of assembling a crack team of freelancers, and this scenario may be impossible with current strategies. This puts pressure on developers and publishers, and is an inhibitor to embracing the environment where the consumer sets the price.

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: thecurveonline.com

6 Comments

guest

December 1, 2011 at 6:43 pm

Regarding Madonna’s agreement with LiveNation, it makes perfect sense regardless of the state of the recording industry. Album sales revenue flows to the publisher. Event revenue flows to the artist. Artists enter into deals with publishers to achieve recognition so that they can sell concert tickets. In Madonna’s case, having achieved recognition, she can cut straight to the event.

I am not surprised. I remember playing precursors a while ago for entire days. For me nothing else existed. It was so exciting I do not believe any album that I have ever listened to made me feel in such a way.

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